These 3 For-Profit Education Stocks Could Be Beaten Down Gems

Nov. 24, 2014 5:02 AM ETAPEI, APOL, LOPE
John Morgan profile picture
John Morgan
63 Followers

Summary

  • For-profit education stocks are in disfavor with many investors because of bad practices by a few companies that relied on feeding at the trough of federal student loan dollars.
  • Some of these companies are worth a second look, especially those that are diversifying their business models.
  • Online education expansion, global growth, and new target enrollments and degree programs should help transform the industry.
  • Heavy institutional support and analyst optimism indicate a bright future for some of these names.

Individual investors may want to wise up when it comes to for-profit education stocks - smart Wall Street money is keeping big positions in their shares as the industry transforms itself for the 21st century.

For-profit education stocks have been roundly ripped and dismembered in the mainstream media in recent years for not delivering up promised value, and in some cases for feeding off of federal student loan programs.

These companies' brick-and-mortar campuses started shedding enrollments a few years ago. Some of the players - plagued by high dropout rates -- attracted plenty of bad press for encouraging sub-par students who never graduated to go into debt.

On top of that, some of the for-profit education schools attracted Congressional disfavor after it was shown their business models depended on getting hundreds of millions of dollars in Title IV funds, even while many of their former students defaulted on their federal loans.

But that was then and this is now.

Some of the for-profit education players have gone out of business or cleaned up their acts. The more reputable players are diversifying their models - both geographically and in preparing for what is likely to be the inevitable acceptance, eventually, of online education as an equal alternative to the traditional brick-and-mortar variety.

Among those who see a bright future in the category is GE chief Jack Welch, who has attached himself to the online education future by lending his name to for-profit Strayer University's MBA program.

Three promising names crop up in this industry. Apollo Education Group (NASDAQ: APOL) is the 40-year veteran and brand name among them that is transforming itself in smart ways. The two others, American Public Education (NASDAQ: APEI) and Grand Canyon Education (NASDAQ: LOPE), are smaller niche players with bright futures.

In terms of Wall Street support, Apollo's institutional ownership amounts to 91.3 percent of outstanding shares, while American Education's is 91.1 percent, and Grand Canyon's is at an even loftier 94.02 percent - a welcome sign of optimism by big money.

They reside in an industry, diversified consumer services, that carries an average P/E of only 18, and all three of these stocks reside close to that modest average - no overblown showboats here.

Apollo Education Group

Apollo has been beset by declines in enrollment at its flagship University of Phoenix, but the university's program diversification and student retention efforts may finally be arresting the decline, and a plan to close 115 physical locations is part of an initiative to slash $675 million in operating costs.

Meanwhile, international enrollments were up 68% in Q4 of fiscal 2014, a definite success story. The Apollo Global unit has expanded beyond plain vanilla college degree programs into education and training for finance and legal professionals. Apollo Global has acquired businesses in Latin America, the UK and Australia, and international expansion is key to the company's growth strategy in coming years.

Apollo is also forging corporate partnerships with Fortune 500 companies to educate their workforces, and is in the process of launching about 400 new programs in the profitable areas of business, education, healthcare and technology, plus dozens of new professional certificate programs.

A potential drag on Apollo in the short term consists of tougher restrictions on receiving Title IV program funds, including maximum student loan default rates and debt-to-earnings ratios of its graduates, and limits on the overall percentage of company revenues that can come from federal student aid programs.

However, with its current healthy emphasis on growing international, corporate and professional certificate programs, Apollo should be able to prosper.

The metrics are good enough on Apollo to conclude its strategy could work. The company reported EPS growth last quarter of 52.63% vs. the prior year period, and has an ROE (TTM) of 18 vs. the industry's 12%, gross margins of 54.41% vs. the industry's 41.66%, and operating margins of 14.78% vs. the industry's 10.91.

The other two companies discussed here, American Public Education and Grand Canyon Education, are less concerned with transformation of an older model. Both are components of the Barron's 400 Index, a measure of U.S. companies with strong fundamentals and growth prospects.

American Public Education

American Public Education has a primary focus on serving military personnel, and manages to serve over 100,000 students. That includes those stationed elsewhere, in dozens of countries, online with its degree programs and certificates in fields ranging from criminal justice to national security.

Many APEI students pay for their education with Department of Defense and Department of Veterans Affairs monies, in addition to private sources and Title IV monies.

One promising angle on APEI is that the company recently bought Hondros College Nursing Programs, which operates four campuses in the fast growing medical field. Hondros likely offers a platform for APEI to expand further into the burgeoning health personnel category - a tremendous expansion of the nation's nursing corps is likely to be necessitated by the graying Baby Boomer bulge, and APEI should be in the thick of meeting the demand.

Another promising angle is APEI's recent pursuit of enrollments among public service workers such as law enforcement personnel.

APEI was scathed by Hondros College acquisition costs and higher taxes in its Q3 earnings results, which were down 16.39% YoY, but its Q4 outlook is much sunnier - the company expects Q4 enrollments to be up 6%-8%, and revenues to jump 7%-9% YoY.

APEI fundamentals look sound: ROE of 17.65%, gross margins of 64.52% and operating margins of 18.07% .

Grand Canyon Education

Grand Canyon Education offers a tweak to the for-profit education model by offering programs onsite at the facilities of its corporate clients, in addition to online and physical campus facilities.

Another twist to the Grand Canyon story is that the company is pondering whether to convert itself to non-profit status, which would allow it to escape a high tax rate of about 37% and attract tax-deductible alumni donations.

CEO Brian Mueller said such a conversion would result in a buyout at a considerable premium for investors, but he could not suggest a timetable, except to suggest the decision would likely play out sometime in 2015. In his Q3 earnings conference call, it seemed clear Mueller would be in favor of such a move if it makes financial sense.

Grand Canyon was up less than 6% over the past 52 weeks through Friday, Nov. 21, so there is plenty of upside room left should the company decide to take itself out.

Grand Canyon's fundamentals also look strong, starting with EPS growth of 26.53% last quarter vs. the year-ago period, plus ROE of 26.59%, gross margins of 62.33% and operating margins of 25.34%, all on a TTM basis.

StarMine's Equity Summary Score of analyst coverage rates both American Public Education and Grand Canyon as Bullish picks, and is Neutral on Apollo. However, analysts surveyed on First Call rate Apollo as a Buy.

CONCLUSION

All three stocks, APOL, APEI and LOPE, appear to have bright prospects and room to move higher, according to analyst consensus and strong institutional support. APOL may take longer than the other two to prove itself capable of profit expansion from here, while LOPE is likely to vault higher overnight if a decision is taken for it to go private.

A basket approach - splitting the investment by buying all 3 stocks with equal amounts of money - might work nicely here. If one stumbles, the other two could pick up the slack.

This article was written by

John Morgan profile picture
63 Followers
John Morgan is the owner of Plaza Media Partners II. He is a journalist and media executive who began his career at United Press International (UPI) and Cable News Network (CNN). He has been a contributor to a range of financial news outlets including Newsmax's Moneynews.com, Midnight Trader, Street Authority, StockViews and MarketGrader. Morgan was the founder of the Entertainment News Wire and several prominent media sites including Adweek.com, Mediaweek.com and Billboard.com. He has held management positions at two successful VC-backed portfolio companies and is an active trader.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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